- The renowned economist Nouriel Roubini assures that the U.S. economy is moving towards a crisis of profound consequences.
- He contradicts analysts who speak of a mild and short-lived recession. For him, this belief is an illusion that does not correspond to reality.
- The recession, he says, will be a hybrid that will combine the worst of the crises of the 1970s and the gigantic contraction of 2008.
The expert economist Nouriel Roubini believes that the crisis that will soon hit the U.S. economy will be deep. In his opinion, the recession that will take place will be very severe and will evoke the worst of the crises of the 1970s and 2008. In a recent interview with Bloomberg, he described the idea that the contraction will be mild and short-lived as an “illusion”.
Also known as “Dr. Doom” because of his accurate predictions of financial catastrophes, he does not see the possibility of a calm recession. In the environment, it is no longer a question of whether or not there will be a contraction, but rather the magnitude of the contraction. Likewise, the number of analysts who believe that the crisis will be deep is increasing as the numbers show.
The specialist assures that the approaching crisis has no parallel in history. According to his thinking, it is an eclectic phenomenon that takes only the worst of previous crises. He says that it resembles the situation of the 1970s in the stagnation and accelerated inflation, but it would be worse in that the contraction then was not accompanied by the debt burden of today.
A recession so severe that it brings out the worst of other crises
The scholar considers that the recession will be so severe that it will seem to be assembled with the worst parts of other crises. It should be noted that this analyst very accurately predicted the 2008 crisis and the subsequent debt situations and deflation that followed as a result of the negative demand shock created by the credit crisis.
In any case, Roubini draws on his authority to assert that the period of stagflation will be of painful proportions for the markets. So far it is uncertain whether the Fed is prepared to raise rates in such a way as to cause inflation to curb high prices. Nor is it clear to what extent prices will rise in the world’s leading economy.
While most analysts agree that there will be a decline in CPI in July, they are not sure if that will be the ultimate ceiling. If so, the Fed may be lifting its foot off the accelerator on money price increases. But there are fears that in succeeding months the bullish line on prices will return to break new 40-year records. Similarly, core inflation is likely to remain noisily high.
This would force the Fed to raise the rate by several pairs of tens of basis points. This is both the worst and most likely scenario which would lead to a severe recession. The magnitude of the new hike and whether it will have a real impact on the major financial market indices will be known this Wednesday.
Here’s how the Federal Reserve has been doing since March
Contrary to President Joe Biden’s claims that inflation was caused by the war in Ukraine, other factors were already driving it. Among them, subsidy policies such as debt purchases of more than $120 billion per month and near-zero interest rates. When the CPI became unbearable, the Fed decided to take action (many believe too late) to remedy the problem.
To that end, it began the process of raising rates in March. Since then it has made total increases of 150 basis points or 1.5%. With this Wednesday’s hike, which, if there are no surprises, would be 75 basis points, that would bring the total to 225 points. But with those constant increases the pace of inflation seems to be unaffected and in June it hit new 40-year highs at 9.1%.
It is this inflation, which cannot be controlled with rate hikes, that leads Roubini to believe that a very severe recession is approaching. As already mentioned, it is very likely that inflation will come down in July, but that would not mean that it would be reaching a ceiling. In other words, for the following months of the year it would continue to rise unless the rate hike is forceful enough to cause a contraction.
At the current pace of rate hikes, rates could reach 350 basis points by the end of the year. Just as the expert does not see moderate inflation, he does not see it as short-lived. “The idea that we are going to have a short, mild recession is just wishful thinking,” Roubini reaffirms.
Summers believes in a velvet recession
At the other extreme, analysts like former U.S. Treasury Secretary Larry Summers are less pessimistic about the shakeout. Despite this, this Harvard economist considers that there is no escape and that the possibilities of a “soft landing” are practically ruled out. He supports this assertion with sufficient historical data from that country.
“We will have a combination of the stagflation situation of 1970 and a debt crisis like in 2008” – Nouriel Roubini
Summers asserts that over the past 65 years every time inflation went above 4% and unemployment fell to 5% or less, recessions came almost naturally within about two years. According to current data, unemployment stood at 3.6% while inflation rose to 9.1% both during the last year ending in June. According to the historical data presented by the economist, the possibilities are ample.
But unlike Roubini, who believes that the recession will be severe, Summers and other analysts believe that it will be a tepid phenomenon. According to the former, “there are many reasons why there will be a severe recession with a giant debt and financial crisis”. During his interview with Bloomberg last July 25, he was emphatic in highlighting the possible size of the contraction.
“In 1970 we had stagflation, but not a massive debt crisis because debt levels were low. After 2008 we had a debt crisis followed by low inflation or deflation,” he stressed. In that sense, he says the contraction will be a hybrid of the worst of both crises.
“Today we face a supply crisis in a context of very high debt levels. This implies that we will have a combination of the stagflation situation of 1970 and a debt crisis as in 2008. It is a stagflationary debt crisis,” he insisted.
Stocks will fall nearly -50%
Another of Dr. Doom’s apocalyptic predictions is that the U.S. and world financial markets will plunge much further in the coming months. In other words, he insinuates that current stock prices are high enough to dare to enter. As low as they appear to be, stocks would be a long way from bottoming out.
Roubini explains that, in a recession of a normal nature, such as many of those that have occurred, assets tend to fall by as much as 35%. But in a severe recession such as the approaching one, stocks should not be expected to recover before falling to their true depth which would be lower than they are at the current point.
“Because the next recession will be stagflationary and accompanied by a financial crisis, the stock market crash could be closer to 50%,” he adds. For years, the specialist considers that the U.S. economy has been moving out of control, which would be creating a “perfect storm” that will take it straight to a “great depression” with few equivalents in history.
He affirms that debt rates are at a very high point in developed nations around the world. On average, he warns that debts are over 420% (and rising) of Gross Domestic Product (GDP) and getting out of this quagmire will only be possible through a collapse commensurate with the size of the indebtedness. In his opinion, the “zombie corporations” that used the cheap debt that was available during the pandemic to create businesses that will not be profitable have made the situation worse.
Federal government support will no longer be available
The economic collapse that loomed during the pandemic was only averted by the federal government with stimulus and low rates. However, now households, corporations and the government will no longer be bailed out in the coming contraction. That creates a highly negative expectation for the markets, he warns.
In the same vein, other analysts take it for granted that the Fed will not hold back on rate hikes. This is because, while CPI inflation may fall this month, core inflation, which excludes the prices of fuel, food and other volatile products, will not. Thus, if core inflation remains high, as Morgan Stanley’s Ellen Zentner expects, there is no reason to assume that central bank hawks will go soft.
With this in perspective, it can be said that the probability of a severe recession is greater than a mild one. The aforementioned bank believes that by December rate hikes will reach 3.625% and it will not be until late 2023 that the first timid cuts will occur. Quoted in Fortune, the specialists of this financial institution insinuate that next year will be a year of generalized crisis.
Thus, Roubini’s forecasts seem to be in line with those of a larger number of Wall Street analysts. In the worst-case scenario suggested by Dr. Doom, the benchmark stock index, the S&P 500, could lose as much as 40% from its current point, which would imply a drop to 2,400 points.
IMF paints a totally gray picture
The International Monetary Fund (IMF) echoed Roubini’s prediction of an immediate future plagued by major economic upheavals. The organization’s cut in global growth was notable and is placed at 3.2% for the end of this year. The reason for this cut is the high prices that households and companies have to face. The April forecast pointed to a world GDP of 3.6% as reported by INVESTOR TIMES.
According to the fund, inflation in developed economies will average 6.6% this year. As for emerging markets and non-developed nations, the average would be 9.5%. Inflation “is eroding the purchasing power of consumers and households. And that is leading to lower demand,” says IMF EC Pierre-Olivier Gourinchas in an interview with Yahoo Finance.
The representative of the monetary institution says that this is one of the drivers that, if not properly managed, would lead to a severe global recession. There are two other elements besides inflation that lead the body to lower economic growth forecasts. These are the war in Ukraine and the GDP situation in China. The first of these affects the EU countries, which face a very delicate immediate future.
As for China, the specialist says that despite the GDP shock and the decrease in the projection for this year (the lowest since 1976) the authorities of that country have greater options than Western countries. For example, this country has fewer problems with inflation and has greater political control over the economy, which allows the government to take more appropriate measures, he explains.
Eurozone to bear the brunt of the crisis
Another aspect outlined by Gourinchas, is that Europe will take the worst part of the cake. The reason for this is the dependence of natural resources on Russia. Thus, the IMF is considerably revising the growth forecasts for the Eurozone, especially for the next 2023.
For the coming year, the economic slowdown in the old continent would result in a shockingly low GDP growth (1.2%). But such a pessimistic forecast is subject to be worse according to the scenario of relations with Russia. For example, if natural gas shipments from the Slavic country to the euro zone come to a complete halt, there will be a new revision.
Under that parameter, a rather severe situation would be foreseen for the European community, with a very extreme recession, he warns. “We anticipate that it would wipe out another 0.8% of economic activity in the area.” Simply put, the expected pitiful growth of 1.2% would drop to 0.6%, which is extremely low for a bloc of highly developed nations.
The feud with Russia seems to be taking a crude toll on the EU’s economic interests. As a result, some countries are already lowering the tone about a possible military defeat of Russia with NATO assistance. Recently, German Defense Minister Christine Lambert assured that her country is not in a position to send further assistance to Ukraine in terms of armaments.
Is North America already in recession?
Analysts’ opinions on the state of the world’s leading economy remain divided as to whether recession is approaching or has already arrived. Another group believes that determining that fact is already unimportant. A recent Morning Consult poll found that 65% of voting-age Americans think the recession is here. This is up 14 percentage points compared to the results of the same poll in March 2020.
Another survey last month by the Boston Consulting Group reflects that 80% of investors think the recession will be here in less than 12 months. Of these, 40% believe that there is no need to wait that long, as a severe recession would come much sooner or is already on the couch.
“The word recession casts a long shadow over the markets, but in a way, the only way out of this inflationary environment is for central banks to trigger a recession,” says Mabrouk Chetouane, head of global market strategies at Natixis Investment Managers Solutions in a report quoted in CNN.
On the other hand, U.S. President Joe Biden believes that the U.S. economy will not fall into a recession. In statements to reporters, the President assured that unemployment is among the lowest in history. He also added that people are actively investing.
“I don’t think we are going to – God willing – have a recession,” said the head of state of the North American country.
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